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Greenspan Still Sees 33% Chance of U.S. Recession

Reuters
Friday, 11 May 2007 | 4:13 AM ET

Former U.S. Federal Reserve Chairman Alan Greenspan said on Friday he still believed there was a one-third chance that the U.S. economy would slip into recession this year, reiterating a statement made in March.

Greenspan shook markets in February when he said it was possible the U.S. economy might fall into recession by the end of the year. He later said he saw a one-third chance of a recession.

"My arithmetic says if there's a one-third probability of a recession, then there's a two-thirds probability there won't be a recession," Greenspan told a closed-door Merrill Lynch investor forum, according to an official at the U.S. investment bank.

The United States economy grew at a tepid 1.3% annualized rate in the first quarter -- the weakest pace in four years.

Greenspan said he had not changed his view on the health of the world's biggest economy but conceded that some might say he had changed his mind, the official quoted him as saying.

Greenspan spoke via a satellite link from Washington. His remarks contrast with those of Ben Bernanke, the Fed's chairman, who has played down the risk of a recession.

Commenting on the strength of the Chinese currency, the yuan or renminbi, Greenspan said China, the world's fourth-largest economy, would bear the brunt of its artificially weak currency and that money supply was growing too rapidly.

"It's in China's self-interest to allow the renminbi to move up faster," he was quoted as saying.

"There is an undue fear of allowing the exchange rate to rise. It's a mistake not allowing it to rise."

Greenspan said he doubted that unemployment would rise in China, should a stronger currency hit exports, adding that the country's labour market was "very sophisticated."

No Repeat of 1997

He said the impact of any slowdown in the U.S. economy on Southeast Asia would be mitigated by high savings rates and domestic consumption.

"Any slowdown will be somewhat offset," Greenspan said, adding that he saw no repeat of the 1997 Asian financial crisis due to strengthened central bank foreign currency reserves.

"The chance of '97 happening again is virtually non-existent."

The fundamental reason for the yen carry trade -- borrowing the low-yielding currency to invest in high-yielding assets in other currencies -- was ultra-low Japanese interest rates, he said.

"The yen carry trade is not an economic phenomenon, it is a cultural phenomenon. Why is it that the 10-year JGB (Japanese Government Bond) is yielding 1.6%, significantly less than anywhere else in the world?" Greenspan said towards the end of his address, when reporters were able to access the forum.

Greenspan has previously said he takes great care not to comment directly on monetary policy, but that making economic predictions is fair.

The U.S. Federal Reserve held interest rates steady at 5.25% on Wednesday and stuck to a forecast of steady growth despite signs of economic weakness.

Analysts expect a rate cut may be in store later this year, although the Fed remains focused on price pressures due to worries that the tight labour market could fuel inflation.

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